The following is a guest post written by Ashley Jenkins, one of our writers.
I recall learning about compound interest when I was in 8th grade. My 8th-grade math teacher went over an interesting math problem: she asked: “how much do we need to save to reach $1 million?”
This problem resonated with me for many years because I was always fascinated by money, especially how to become a millionaire!
If you started saving $100/month when you were 14, assuming a yearly 8% compounded rate of return, by the age of 20, you would have $10,850. Notice how you only saved $1,200 per year for six years, or $7,200, but, by your 20th year, you would have $10,859. The difference is $3,659, all of which is interest.
As a quick example, by the age of 30, 40, 50, 60, and 65, you would have:
- Age 30 = $40,829
- Age 40 = $105,530
- Age 50 = $245,217
- Age 60 = $546,789
- Age 65 = $810,453
Teaching Our Children About Compound Interest
Unfortunately, I didn’t take action on investing for quite a while and I made a few mistakes. Maybe I wasn’t paying enough attention in school.
As parents, how can we do better teaching our children about personal finance? In addition, how can we affect change in our school systems to teach our children the basics about personal finance?
In this post, I’ll cover some of my early money mistakes, ideas for how to teach our children about personal finance, and the topics schools could introduce that relate to personal finance.
Money Mistakes Adults Make
I made many mistakes early on.
I Didn’t Save Enough Money in High School
I started working in the 8th grade. My first job was picking strawberries. It was great because, in theory, my earning potential was unlimited. I was paid per pound of strawberries I picked. However, there was only a finite amount of strawberries to be picked.
I think I made around $.20 a pound. The season lasted about 2-3 weeks and we didn’t pick every day. I think I grossed somewhere around $500 over that 2-3 weeks. Not too shabby for a youngster!
It was a perfect job because I lived close to work and I peddled my bike to the strawberry patch each morning.
After my first year picking strawberries, I realized I liked making money. I applied to a local catering company and was hired. I worked there throughout high school and a little in college. $5.15/hour was my starting wage. In the summer, I would work 60-80 hours each week depending on how much work was available. Overtime pay was sweet because I was paid time and a half.
Embarrassingly, I saved very little of the money I made. I did pay for my own vehicles in high school, gas, and insurance. But still, I should have saved some money for college…
Cashing out my Roth IRA
In my junior year of college, I was sold by one of the big financial companies on a permanent life insurance policy and starting a Roth IRA. Being the personal finance newbie I was, I continued to contribute to my permanent life policy until I was 28 and I cashed out my Roth IRA after a few years – around age 25.
I still don’t recall why I cashed out my Roth IRA, but it angers me to this day that I did!
If I could go back in time I would have reversed what I did. I would have continued contributing to my Roth IRA and stopped paying into that dreadful permanent life policy. There are many other financial mistakes I made. Hopefully, if a younger version of me, or any young person for that matter is reading this blog I hope they learn from the mistakes I made.
What Can We Teach Our Children About Compound Interest?
In school, besides the compound interest topic covered by my 8th-grade math teacher the only other personal finance topics I was exposed to was how to write a check and picking stocks.
Writing a check was somewhat useful ten years ago, but all of my bills are on auto-payment today. I think it was an English class where we picked stocks, which doesn’t make sense – English class and economics. It was fun to pick a few stocks and watch how they performed over the course of a semester. The person that had the largest return won a few extra credit points. But there was no useful information that we took away from the exercise.
We were basically taught to roll the dice, pick a few stocks, and hope for the best. This is a terrible lesson and it is something I think many people do. Instead, we should be educating people about the benefits of low-cost index funds – how you are exposed to a significant number of companies through one index fund. And by the way, the fees for these funds is EXTREMELY low.
5 Steps to Teach Children About Compound Interest
As parents, the key is that we need to be open with our children about finances and the importance of money management. I’ve read a few neat ideas on this topic on other blogs.
1. Match Their Savings Dollar for Dollar
One idea I like is matching every dollar your child saves. Therefore, when they want to spend money on something, it essentially costs them double because of the money you’d match if they instead saved the money.
Another idea is matching the contribution toward their first car – if they put $500 toward a car, the parent matches the $500.
My daughter is 9 months old, so I have some time to think about this more and refine what my wife and I plan to do
2. Speak with the School Teacher and Ask Them to Discuss Money Basics
Schools should start by showing children the importance of saving and how saving early can pay off in the long run. This hypothetical class would include covering other basic topics like budgeting, investing, insurance coverage, and debt avoidance.
Another important topic schools need to better educate children on is the different career opportunities that exist. A college is definitely a great option, but it isn’t the only option for children. Many people are successful going into a trade, starting their own business, taking time off to work a job and save while they figure out what they want to do, etc.
Using a trade as an example, like becoming a plumber, enables someone to begin making money more quickly compared to going to college. In addition, the cost of education is much less. Finally, there are opportunities to eventually run your own business, which provides its own set of perks
The cost of education is important and it is an area that can cripple a young adult. The topic of student debt gets me fired up – really fired up. It doesn’t make sense that colleges knowingly charge such high costs for degrees that will pay very little. I understand part of this is on the students, but as I’ve reviewed, we have a system that is broken because it doesn’t teach children the return of their investment – at least not in my experience.
3. Help Them Understand What Interest Is
By introducing the concept of matching their savings, dollar for dollar, or penny for penny, it will help them understand that for every dollar they save, they earn more, similar to what happens when you put money in the bank.
4. Ask Them To Loan the Money Back to You
Now, when you do this, explain to them that you will pay them more money in 2 months. So, if they give you $10 today, you will give them $11 back in 2 months, $13 back in 6 months, and if they wait for a full year, then you will give them $15.
5. Run this Interest Exercise Once Again
Now that they have $15 in their hands in 1 year, explain to them that you will run this exercise once again, only this time, the interest now goes up, and you will give them back $21 in one more year. At first, they earned $5, but, now that they gave you $15, they’re earning more interest. They earn $6.
I like that there are ideas out there to help make the cost of college more manageable. Hopefully, this problem gets more attention and a good solution is implemented.
If you enjoyed this article, you might also enjoy this one: My Journey Post Business Sale as I Sail Into a New Harbor. The Next Stage, Entrepreneur Semi-Retirement, and Life Post Business Sale
